Railroad Retirement Investment Threatens Social Security Reform

Under the guise of increasing benefits for the
widows of railroad workers, Congress is considering the Railroad
Retirement and Survivors' Improvement Act (H.R. 4844). Supporters
claim that this bill will increase benefits while reducing the
amount that industry has to contribute to retirement funds. It
sounds too good to be true, and it is. Overall, H.R. 4844 would
increase federal spending by $3.6 billion between 2001 and 2010
while reducing revenue going into the system by over $3.9 billion.
The Congressional Budget Office (CBO) says that this combination
and a controversial asset exchange would reduce the budget surplus
by $13.6 billion from 2001 through 2010. To make matters worse,
this dangerous precedent could very well ruin Congress's chances to
pass meaningful Social Security reform.

The Railroad Retirement Fund. Established in 1935, the Railroad Retirement Board pays
retirement benefits to about 748,000 former railroad workers and
their spouses. Railroad workers are not covered by Social Security,
although they may qualify for those benefits if they worked at
another job at some point. Workers receive both a Tier I benefit,
which approximates Social Security, and a Tier II benefit, the
equivalent of a multi-employer pension. Benefits are financed
through taxes assessed on both the railroads and individual work
ers. Monthly benefits average $1,340 for retired workers and $510
for spouses.

The Wrong Way to Help Retirees. H.R. 4844 follows two years of negotiations between the
railroads and their unions to shore up a retirement program that
has far more retirees to support than workers who contribute. In
addition to increasing benefits for widows, the legislation would
reduce the normal retirement age for Tier I benefits to 60, allow
workers to become vested more quickly, and reduce the tax rate on
employers. To make up the lost revenue from these changes, H.R.
4844 would set up a mechanism for the government to invest directly
in the stock market by investing the assets of the Railroad
Retirement Board in private securities instead of government
bonds.

Testifying about a similar proposal by the
Clinton Administration to invest part of the Social Security trust
fund in the stock market, Federal Reserve Board Chairman Alan
Greenspan warned that such an approach would make it almost
impossible to insulate investment decisions from political
interference. In short, H.R. 4844's few good features are not
enough to repair the problems it would create. The bill would:

Raise benefits for widows and
widowers. Under current law, surviving spouses receive a benefit equal
to 50 percent of the deceased worker's benefit. H.R. 4844 raises
this amount to 100 percent, which is in line with benefits under
Social Security. The CBO estimates that this change will cost $935
million from 2001 through 2010--about 7 percent of the total cost
of H.R. 4844.

Lower vesting requirements. Currently, workers must be employed by railroads for at least
10 years to qualify for retirement benefits. H.R. 4844 would lower
this to five years, equal to the vesting requirement for private
pension plans. The CBO says this will cost $5 million from 2007
through 2010.

Have a high budget impact. The CBO estimates the bill will cost $14.9 billion in fiscal
year (FY) 2001 alone, mostly from scoring the transfer of funds now
invested in government bonds to private investments as a budget
outlay. Overall, it would increase spending by $3.6 billion from
2001 through 2010 while reducing revenue by over $3.9 billion.

Reduce the retirement age
irresponsibly.
A 1983 agreement raised the age at which railroad retirees could
receive full Tier I benefits from age 60 to 62, bringing the
railroad retirement system in line with the earliest age at which
other workers can receive Social Security benefits. Lowering the
age requirement is costly: The CBO estimates that this provision
will cost $2.5 billion from 2001 through 2010.

Lower railroad contributions. While workers' taxes would remain untouched, the bill would
reduce the amount that railroads pay into the program by almost $4
billion through 2010. Supposedly, this amount would be made up from
profits made from investing in the stock market, as long as a
politically motivated board invests the trust fund wisely.

A Dangerous Investment Scheme. H.R. 4844 would create a Railroad Retirement Investment Trust
for investing the assets of the Railroad Retirement
Board--estimated at $18.5 billion in December 2000--in private
stocks and bonds. Though the board managing this investment would
be nominally independent, the assets in the trust would be under
the control of political appointees and government bureaucrats.
Giving bureaucrats the power to invest huge amounts of money in the
stock market would create a fundamental conflict of interest
between the long-term needs of future retirees and short-term
political goals. If this model were extended to Social Security's
trust funds, the door would open for government ownership of a
significant portion of the economy.

Some
supporters want to change budget rules to cut the cost of shifting
the board's assets from government bonds to private investments.
Under this plan, a move by a federal agency would be scored as an
exchange of assets, with no budgetary impact. Currently, transfers
of government taxes to private investments by an agency or to an
account owned by an individual are treated equally--as an outlay or
the spending of tax dollars. Changing the rules for an agency would
favor the establishment of direct government investment of the
Social Security trust fund. This action would have no cost, while
setting up personal retirement accounts to help seniors' improve
their own retirement savings would be counted as increasing
spending.

Conclusion. Any benefit that could come from H.R. 4844 would be more than
offset by the damage it would do to Social Security reform.
Moreover, it would perpetuate a system that almost went broke in
the early 1980s. Congress salvaged the program with tax hikes and
budget reductions. The railroads and their unions are now trying to
hide their latest raid on the Treasury by talking of widows'
benefits, which total only 7 percent of the overall cost of this
bill, according to the CBO; 93 percent would benefit the railroads
and their unions. Rather than follow the fiscally irresponsible
course outlined in H.R. 4844, Congress should completely reform the
railroad retirement system.

David C. John is
Senior Policy Analyst for Social Security at The Heritage
Foundation.

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